Question

ABERCROMBIE & FITCH CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS

Abercrombie & Fitch Co. (“A&F”), a company incorporated in Delaware in 1996, through its subsidiaries (collectively, A&F and its subsidiaries are referred to as “Abercrombie & Fitch” or the “Company”), is a global, multi-brand specialty retailer, which primarily sells its products through its wholly-owned store and direct-to-consumer channels, as well as through various third-party wholesale, franchise and licensing arrangements. The Company offers a broad assortment of apparel, personal care products and accessories for men, women and kids under the Hollister, Abercrombie & Fitch and abercrombie kids brands. The brands share a commitment to offering products of enduring quality and exceptional comfort that allows customers around the world to express their own individuality and style. The Company has operations in North America, Europe, Asia and the Middle East.

          2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

The accompanying Consolidated Financial Statements include historical financial statements of, and transactions applicable to, the Company and reflect its assets, liabilities, results of operations and cash flows.

The Company has interests in a United Arab Emirates business venture and in a Kuwait business venture with Majid al Futtaim Fashion L.L.C. (“MAF”), each of which meets the definition of a variable interest entity (“VIE”). The Company is deemed to be the primary beneficiary of these VIEs; therefore, the Company has consolidated the operating results, assets and liabilities of these VIEs, with MAF’s portion of net income presented as net income attributable to noncontrolling interests (“NCI”) on the Consolidated Statements of Operations and Comprehensive Income (Loss) and MAF’s portion of equity presented as NCI in the Consolidated Balance Sheets.

Fiscal year

The Company’s fiscal year ends on the Saturday closest to January 31. All references herein to the Company’s fiscal years are as follows:

Fiscal year		Year ended		Number of weeks
Fiscal 2015		January 30, 2016		52
Fiscal 2016		January 28, 2017		52
Fiscal 2017		February 3, 2018		53
Fiscal 2018		February 2, 2019		52

Use of estimates

The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Due to the inherent uncertainty involved with estimates, actual results may differ.

Cash and equivalents

Cash and equivalents on the Consolidated Balance Sheets include amounts on deposit with financial institutions, U.S. treasury bills and other investments, primarily held in money market accounts, with original maturities of less than three months. Receivables

Receivables on the Consolidated Balance Sheets primarily include credit card receivables, construction allowances, value added tax (“VAT”) receivables, trade receivables, income tax receivables and other tax credits or refunds.

As part of the normal course of business, the Company has approximately three to four days of proceeds from sales transactions outstanding with its third-party credit card vendors at any point. The Company classifies these outstanding balances as credit card receivables. Construction allowances are recorded for certain store lease agreements for improvements completed by the Company. VAT receivables are payments the Company has made on purchases of goods that will be recovered as those goods are sold. Trade receivables are amounts billed by the Company to wholesale, franchise and licensing partners in the ordinary course of business. Income tax receivables represent refunds of certain tax payments along with net operating loss and credit carryback claims for which the Company expects to receive refunds within the next 12 months.

Inventories

Inventories on the Consolidated Balance Sheets are valued at the lower of cost and net realizable value on a weighted-average cost basis. The Company reduces the carrying value of inventory through a lower of cost and net realizable value adjustment, the impact of which is reflected in cost of sales, exclusive of depreciation and amortization, on the Consolidated Statements of Operations and Comprehensive Income (Loss). The lower of cost and net realizable value adjustment is based on the Company’s consideration of multiple factors and assumptions including demand forecasts, current sales volumes, expected sell-off activity, composition and aging of inventory, historical recoverability experience and risk of obsolescence from changes in economic conditions or customer preferences.

Additionally, as part of inventory valuation, inventory shrinkage estimates based on historical trends from actual physical inventories are made each quarter that reduce the inventory value for lost or stolen items. The Company performs physical inventories on a periodic basis and adjusts the shrink estimate accordingly. Refer to Note 4, “INVENTORIES.”

Other current assets

Other current assets on the Consolidated Balance Sheets include prepaid rent, current store supplies, derivative contracts and other prepaids.

17. SEGMENT REPORTING

The Company's two operating segments are brand-based: Hollister and Abercrombie, the latter of which includes the Company’s Abercrombie & Fitch and abercrombie kids brands. These operating segments have similar economic characteristics, classes of consumers, products, production and distribution methods, operate in the same regulatory environments, and have been aggregated into one reportable segment.

The Company’s net sales by operating segment for Fiscal 2017, Fiscal 2016 and Fiscal 2015 were as follows:

(in thousands)	Fiscal 2017				Fiscal 2016				Fiscal 2015
Hollister	$	2,038,598			$	1,839,716			$	1,877,688
Abercrombie	1,454,092				1,487,024				1,640,992
Total	$	3,492,690			$	3,326,740			$	3,518,680

The Company’s net sales by geographic area for Fiscal 2017, Fiscal 2016 and Fiscal 2015 were as follows:

(in thousands)	Fiscal 2017				Fiscal 2016				Fiscal 2015
United States	$	2,208,618			$	2,123,808			$	2,282,040
Europe	811,664				768,630				832,923
Other	472,408				434,302				403,717
Total	$	3,492,690			$	3,326,740			$	3,518,680

The Company’s long-lived assets by geographic area as of February 3, 2018, January 28, 2017 and January 30, 2016 were as follows:

(in thousands)	February 3, 2018				January 28, 2017				January 30, 2016
United States	$	494,132			$	543,923			$	548,983
Europe	192,133				215,124				263,977
Other	78,064				92,783				109,275
Total	$	764,329			$	851,830			$	922,235

19. QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized unaudited quarterly financial results for Fiscal 2017 and Fiscal 2016 are presented below. See “RESULTS OF OPERATIONS,” in “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” of this Annual Report on Form 10-K for information regarding items included below that could affect comparability between quarterly results.

(in thousands, except per share amounts)
Fiscal Quarter 2017	First				Second				Third				Fourth
Net sales	$	661,099			$	779,321			$	859,112			$	1,193,158
Gross profit (1)	$	398,925			$	460,895			$	526,627			$	697,395
Net (loss) income	$	(61,009	)		$	(14,615	)		$	10,616			$	75,533
Net (loss) income attributable to A&F (2)	$	(61,700	)		$	(15,491	)		$	10,075			$	74,210
Net (loss) income per basic share attributable to A&F (3)	$	(0.91	)		$	(0.23	)		$	0.15			$	1.08
Net (loss) income per diluted share attributable to A&F (3)	$	(0.91	)		$	(0.23	)		$	0.15			$	1.05
(in thousands, except per share amounts)
Fiscal Quarter 2016	First				Second				Third				Fourth
Net sales	$	685,483			$	783,160			$	821,734			$	1,036,363
Gross profit (1)	$	425,721			$	477,107			$	510,739			$	615,001
Net (loss) income	$	(38,630	)		$	(12,031	)		$	8,274			$	50,105
Net (loss) income attributable to A&F (4)	$	(39,587	)		$	(13,129	)		$	7,881			$	48,791
Net (loss) income per basic share attributable to A&F (3)	$	(0.59	)		$	(0.19	)		$	0.12			$	0.72
Net (loss) income per diluted share attributable to A&F (3)	$	(0.59	)		$	(0.19	)		$	0.12			$	0.71

ABERCROMBIE & FITCH CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Thousands)

	Fiscal 2017				Fiscal 2016				Fiscal 2015
Operating activities
Net income	$	10,525			$	7,718			$	38,559
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	194,549				195,414				213,680
Asset impairment	14,391				7,930				18,209
Loss on disposal	7,460				3,836				11,082
Amortization of deferred lease credits	(22,149		)		(24,557		)		(28,619		)
Provision for (benefit from) deferred income taxes	37,485				(7,150		)		7,537
Share-based compensation	22,108				22,120				28,359
Changes in assets and liabilities
Inventories	(18,298		)		24,452				21,253
Accounts payable and accrued expenses	13,622				(32,647		)		51,050
Lessor construction allowances	17,934				10,288				11,082
Income taxes	13,698				(8,528		)		(45,027		)
Long-term lease deposits	(810		)		26,649				(1,237		)
Other assets	6,107				(32,291		)		9,204
Other liabilities	(10,918		)		(7,927		)		(25,123		)
Net cash provided by operating activities	285,704				185,307				310,009
Investing activities
Purchases of property and equipment	(107,001		)		(140,844		)		(143,199		)
Proceeds from sale of property and equipment	203				4,098				11,109
Other investing activities	—				—				9,523
Net cash used for investing activities	(106,798		)		(136,746		)		(122,567		)
Financing activities
Purchase of treasury stock	—				—				(50,033		)
Repayments of borrowings	(15,000		)		(25,000		)		(6,000		)
Dividends paid	(54,392		)		(54,066		)		(55,145		)
Other financing activities	(5,421		)		(5,443		)		4,235
Net cash used for financing activities	(74,813		)		(84,509		)		(106,943		)
Effect of exchange rates on cash	24,276				(5,441		)		(12,629		)
Net increase (decrease) in cash and equivalents	128,369				(41,389		)		67,870
Cash and equivalents, beginning of period	547,189				588,578				520,708
Cash and equivalents, end of period	$	675,558			$	547,189			$	588,578
Significant noncash investing activities
Change in accrual for construction in progress	$	(22,458	)		$	(6,104	)		$	12,859
Supplemental information
Cash paid for interest	$	13,381			$	15,254			$	16,060
Cash paid for income taxes	$	16,230			$	30,984			$	49,745
Cash received from income taxes	$	27,934			$	7,333			$	1,043

ABERCROMBIE & FITCH CO.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Thousands, except per share amounts)

	Fiscal 2017				Fiscal 2016				Fiscal 2015
Net sales	$	3,492,690			$	3,326,740			$	3,518,680
Cost of sales, exclusive of depreciation and amortization	1,408,848				1,298,172				1,361,137
Gross profit	2,083,842				2,028,568				2,157,543
Stores and distribution expense	1,542,425				1,578,460				1,604,214
Marketing, general and administrative expense	471,914				453,202				470,321
Restructuring benefit	—				—				(1,598		)
Asset impairment	14,391				7,930				18,209
Other operating income, net	(16,938		)		(26,212		)		(6,441		)
Operating income	72,050				15,188				72,838
Interest expense, net	16,889				18,666				18,248
Income (loss) before taxes	55,161				(3,478		)		54,590
Income tax expense (benefit)	44,636				(11,196		)		16,031
Net income	10,525				7,718				38,559
Less: Net income attributable to noncontrolling interests	3,431				3,762				2,983
Net income attributable to A&F	$	7,094			$	3,956			$	35,576
Net income per share attributable to A&F
Basic	$	0.10			$	0.06			$	0.52
Diluted	$	0.10			$	0.06			$	0.51
Weighted-average shares outstanding
Basic	68,391				67,878				68,880
Diluted	69,403				68,284				69,417
Dividends declared per share	$	0.80			$	0.80			$	0.80

In Business Assignment 3 we will look at the Cash Flow Statement and selected financial statement footnotes for Abercrombie & Fitch Co. (A&F). Refer to the file, “Business Assignment 3 Financial Information” and answer the questions below. Add lines as needed. Business Assignment 3 is worth 50 points.

We will start by looking at selected financial statement footnotes. You will want to refer to Appendix 14A: Financial Statement Disclosures in our textbook.

1. The first footnote describes the business. (12 points)

A. What are the three brands names of A&F merchandise?

                    1.

                    2.

                    3.

B. What are the five ways that A&F sells their products?

                    1.

                    2.

                    3.

                    4.

                    5.

C. A&F offers a variety of products for sale. List three.

                    1.

                    2.

                    3.

2. Look at the section, “Summary of Significant Accounting Policies” (16 points)

A. A&F uses a 52-week fiscal year, which is typical for retailers. Indicate the start

date and the end date for A&F’s most recent fiscal year completed, 2017.

1. Start date:

                    2. End date:

B. Cash and cash equivalents are discussed on page 468 of our text. Look at

the footnote for A&F. List three things that are included in cash and cash

equivalents for A&F. (3 points)

                    1.

                    2.

                    3.

          C. What inventory costing method does A&F use to value its inventory?

         

D. List the two operating segments A&F identifies for 2017:

                    1.

                    2.

          E. List the three geographic segments A&F identifies for 2017:

                    1.

                    2.

                    3.

          F. A&F identifies its sales per quarter.

                    1. Which quarter has the highest amount of net sales for 2017?

                    2. Why do you think this is the quarter with the highest net sales for A&F?      

3. Move to the Statement of Cash Flows for A&F (10 points)

          A. Does A&F use the direct method or the indirect method? Explain how you

                 can tell using 2 complete sentences.

          B. The cash flow statement reports on three activities. List them and indicate the

                 amount of cash provided/used for 2017.

         

Activity	Cash provided/used

C. The cash balance increased in 2017 for A&F. What were the two largest

          line items on the cash flow statement that increased cash? List the item and the

          amount.

                   

Line Item	Amount

4. The Consolidated Statement of Operations is another name for the income statement. Use this statement to compute the ratios we learned in Chapter 14. (12 points) Show your numbers to 2 decimals (i.e. .3456 = 34.56%).

          A. Compute the Gross Profit Percentage for 2017 and 2016. Show your

                 computations.

                    1. 2017:

                    2. 2016:

                    3. Did the Gross Profit percentage improve from 2016 to 2017?

          B. Compute the Return on Sales (Profit Margin) for 2017 and 2016. Show your

                 computations.

1. 2017:

                    2. 2016:

                    3. Did the Return on Sales percentage improve from 2016 to 2017?

This is the end of Business Assignment 3. Save your file and upload on Blackboard.

Answer 1

1.A.Three brands names of A&F merchandise are:

1. Hollister,
2. Abercrombie & Fitch and
3. Abercrombie

B.5 ways that A&F sells their products are:

1. Direct-to-consumer channels,
2. Third-party wholesale,
3. Franchise and
4. Licensing arrangements
5. Wholly-owned store

C. Three products for sale are:

1. Apparel,
2. Personal care products and
3. Accessories

for men, women and Kids.

2-A Fiscal Year- Start date: 1st Feb 2017

End date: 3rd Feb 2018

B.Three things that are included in cash and cash equivalents for A&F are:

1. Deposit with financial institutions,
2. U.S. treasury bills and
3. Other investments, held in money market accounts, with original maturities of less than 3 months.

C.Inventories are valued at the lower of cost and net realizable value on a weighted-average cost basis. Also inventory shrinkage estimates based on historical trends from actual physical inventories are made each quarter that reduce the inventory value for lost or stolen items.

D-The Company's two operating segments are brand-based: 1.Hollister and 2. Abercrombie

E The 3 geographies where the company has presence are:

1. United States
2. Europe
3. Other Geographies.

F. 1. Fourth Quarter with $1,193,158,000 has the highest Net sale in the whole Fiscal Year of 2017

2.We can analyse fourth quarter of 2017 vis a vis fourth quarter of 2016. Both have the highest amount of Net sales in their respective fiscal year. Secondly there is an increasing trend from first quarter till the last quarter and thus the Last quarter outperforms the other 3 quarters in the same year.

3)A) A & F uses indirect method for Preparing Cash flow statement. In this method, Net income from income Statement is the basis and all the non cash expenditures are adjusted along with the changes in the items of Current assets and Current Liabilities.

B) Activities Amount

Cash flow from Operating Activities $ 285,704 ( Cash Inflow)

Cash flow from Investing Activities $ 106,798 (Excess used)

Cash flow from Financing Activities $ 74,813 (Excess Used)

C) Line item Amount

Benefit from Deferred income Taxes $37485

Exchange Rate in cash $24276

4-A)GP %= Gross profit / Net sales 2017 = 2,083,842 / 3,492,690 = 0.5966 or 59.66% 2016 = 2,028,568 / 3,326,740 = 0.6098 or 60.98% No the Gross profit percentage decresed in 2017 due to higher COGS in 2017. B) Return on Sales(Profit Margin) = Net income / sales 2017 = 7094 / 3,492,690 = 0.20% 2016 = 3956 / 3326740 = 0.12% The profit Margin has improved in 2107 as compared to 2016 after distributing to all non controlling interests.